If Demographics Are Destiny, The Future For South Korea Is Not Good

June 29, 2017

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By Guest Post. Originally published at ValueWalk.

This week, I’ve been in Seoul, South Korea. I’m always on the lookout for exciting investment opportunities, and the country’s stock market is cheap – so here I am.

South Korea boasts the 11th-largest economy in the world, just behind Canada and just ahead of Russia. Over the past 30 years, the economy has grown at an average of 9 percent per year. The country’s 50 million people live in an area one-fifth the size of California (or about one-third the size of Vietnam… or 142 times bigger than Singapore).

Although I’ve been following Korean markets for a while, this was my first visit. There’s just no substitute for going to a place and seeing it for yourself. And every time I go someplace new, I note what first strikes me as different and unusual.

I wanted to share with you a few observations on South Korea. In a few days, I’ll tell you what I think of investing in Korea.

There’s trouble ahead for Korea’s aging population

South Korea’s demographics are dire – even worse, by some measures, than Japan’s.

Demographics are destiny, and while some parts of Asia, like the Philippines, Cambodia, and Vietnam are in a demographic sweet spot (along with Africa), South Korea is not. Its fertility rate – that is, births per woman – is one of the world’s worst at 1.2. It’s tied with Singapore, and even lower than Japan, as the graph below shows. (By comparison, average births per woman in the U.S. stands at 1.8, and it’s 1.6 in the European Union.)

In a week of wandering around Seoul, I’ve seen only a handful of children. So why don’t people in South Korea have babies? “Life is expensive, it’s not an easy life, and it’s incredibly competitive for children,” one friend told me over lunch. It’s similar to what people say in Singapore about children.

One solution – which both the U.S. and Singapore apply – is immigration. If you’re not making enough new people, import them. But this is a lot more difficult for South Korea, in part because…

South Korea is one of the least diverse places on Earth

According to a 2003 study, South Korea is one of the least ethnically and culturally diverse countries in the world – rivaled only by (predictably) North Korea and Japan. Of course, a lot has changed since then. South Korea is probably a lot more diverse now than it was in 2003. But wandering around Gangnam – one of the trendier parts of the capital – and it doesn’t exactly strike you as an ethnic and racial melting pot, beyond the obvious tourists.

Immigration as a source of population growth is a lot more difficult – even if immigration-friendly policies are in place – when there’s cultural and ethnic homogeneity. And it doesn’t help that Korean – at least for Westerners – has the well-earned reputation of being a very difficult language to learn.

People in South Korea love their coffee… and their cosmetics

The number of coffee shops in South Korea tripled from 2011 to 2015… and Seoul has more coffee shops per capita than Seattle, the home of Starbucks. A lot of Seoul’s coffee shops are sprawling affairs with enough seats for a busload of people – and (based on my thoroughly non-scientific assessment) they’re busy all the time.

Along with coffee, cosmetics are also big business in South Korea. Per capita spending on cosmetics is about 25 percent higher than in the U.S., nearly six times that of Australia and seven times that of China, according to the U.S. Department of Commerce. Wander through any commercial district and you’ll see one cosmetics shop after another – local brands, international brands and anything else you can think of. AmorePacific, a US$16 billion stock traded on the Korean stock exchange, is the country’s biggest cosmetics and personal care company.